You Own a High-Tech Manufacturing Entity

question 106

Multiple Choice

You own a high-tech manufacturing entity. You would like to expand your operations but to do so you need to either lease or buy a $1.2 million piece of equipment for the next three years. The lease payments would be $475,000 a year for the three years. If the equipment is purchased, it will be depreciated straight-line to zero over the three-year period. The equipment will have no residual value at the end of the three years. Should the equipment be leased, the lessor and the lessee will both have marginal tax rates of 34%. The loan rate for your firm for this purpose is 8% pre-tax.

What is the amount of the annual after-tax lease payment to the lessee?

• A) $104,500
• B) $209,600
• C) $313,500
• D) $449,920
• E) $475,000

Recognize the use of budgeting in performance evaluation.

Acknowledge the relationship between budgeting and long-range planning.

Understand the impact of budgeting on human behavior.

Learn the specifics of preparing various budgets (operating, financial, production).

---

Definitions:

Shock Or Surprise

An emotional or physical response to an unexpected event or piece of information.

Direct Approach

A communication style that is straightforward and to the point, without unnecessary details or digressions.

Negative Message

Communication that conveys a refusal, denial, or unfavorable information in a tactful way.

Positive Statement

An assertion that can be tested and validated, often used in economics to describe facts without judgment.